Bet Pays Off For Citicorp, Ups The Ante For Debtors

``What makes Citicorp work,`` one of its bankers said several years ago,

``is the willingness to take risks.``

That penchant for high-stakes gambles was evident again last week, as the nation`s biggest banking firm announced a decision to add $3 billion to its reserve for bad loans to Third World nations.

At week`s end, most analysts, bankers and investors seemed to agree that the action was good for Citicorp. But they disagreed on whether it also will be good for the debtor nations.

The move will require Citicorp to post a $2.5 billion loss in the second quarter, the largest quarterly deficit recorded by a U.S. banking company. But putting the hit behind it also is expected to permit Citicorp to take a tougher stance in talks with its borrowers, especially Brazil, with whom negotiations are due to begin next month.

The bet seems to have paid off. Citicorp`s stock rose 7.8 percent for the week to $55.37 per share, compared with an 1.8 percent decline in the Standard & Poor`s 500.

``This was a brilliant move on Citicorp`s part,`` said William Isaac, former chairman of the Federal Deposit Insurance Corp.

The bigger a bank`s reserves, the less vulnerable it is to a borrower`s default. In addition, Citicorp has said it may dispose of up to one-third of its nearly $15 billion in Third World debt in the growing secondary market for foreign loans and through so-called debt-for-equity swaps.

In a debt-for-equity swap, a bank exchanges a loan for an equity investment in a country, thus freeing the nation from debt payments and giving the bank a shot at higher future returns. ``It`s a win-win situation,`` a Citicorp official said Friday.

But doubts remain on how Citicorp`s bold step might affect weaker U.S. banks and debt strategies with less developed countries.

``The market and the broader public views this as a great success, but the view in the banking community is that it has more dire implications,``

said Paul Sacks, president of Multinational Strategies Inc., a New York bank consulting firm.

Other money center banks may be forced to follow suit or risk the creation of a two-tiered bargaining situation, with stronger banks able to demand stiffer terms, some experts say.

``Weak banks with piles of these loans won`t be able to do it,`` said one industry source. ``They are absolutely livid at (Citicorp Chairman) John Reed.``

Some observers contend that the action may strike a blow at Treasury Secretary James Baker`s plan for dealing with Third World debt, which requires banks to make new loans in exchange for growth-oriented policy reforms by heavily indebted countries.

``It seems likely that the mobilization of new money will be more difficult now that (Citicorp) itself seemed to say the claims are far from sound,`` said William Cline, senior fellow at the Institute of International Economics in Washington.

Citicorp and Baker deny this. Baker, in a speech here Thursday, said Citicorp`s action would give the banks a position of strength from which to insist on more free-market policies in debtor nations.

But Barry Sullivan, chairman of First Chicago Corp., said a likelier result would be the need for more government funding of debtor nations to make up for a smaller commitment by commercial banks.

Citicorp`s decision marks a major shift from the often-quoted view of its former leader, Walter Wriston, that ``countries never go bankrupt.`` That belief has made Citicorp a leader in Third World lending in size and ``most importantly in the intellectual thought processes,`` said Isaac.

Reed, 48, who succeeded Wriston in 1984, had made it clear earlier this year that he intended to take a harder line on debt concessions, and he has been bolstering the company`s capital. But observers viewed last week`s announcement as his first clear assertion of leadership.

``This is the first thing I can recall him doing that made me say, `Wow, this guy is a true successor to Wriston in terms of bold plans,` `` said David Cates, president of a New York bank consulting firm that bears his name. Robert Back, an analyst at Rodman & Renshaw Inc. in Chicago, added: ``What this really is is Reed asserting himself against Wriston.``

Reed couldn`t be reached for comment. But in an interview, the retired Wriston dismissed such observations as ``wonderful stuff for Sigmund Freud.`` Wriston praised the decision and said he ``probably`` would have followed the same course if he were still chairman. He described reasons behind the move as ``nothing more nor less than the world haschanged.``

He cited effects of recession on debtor economies, a move by the U.S. government to force ``below-market rate deals`` on banks and the stock market`s gloomy view of the debt situation.

The action was ``typical Citibank,`` said Wriston, referring to the company`s main banking subsidiary. ``Since 1812, management has looked at the world with a clear eye. When the world has changed, they stepped up to the bat.``